Cap­i­tal Account Inter­view on the Keen-Krug­man Brawl

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Lau­ren Lyster and Demetri Kofi­nas at Rus­sia Today’s Cap­i­tal Account did their usual bril­liant job in this inter­view with me about the Krug­man brawl, and I’ve been some­what remiss in not post­ing it here ear­lier. I’ve given enough links on this topic in ear­lier posts not to bother now, so look to those if you want to fol­low the debate in more detail.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Steve Hum­mel

    From the wfHum­mel site:

    The national debt is a bur­den on future gen­er­a­tions.

    This is based on the false premise that the national debt must be paid off by the pri­vate sec­tor some day. In real­ity, the gov­ern­ment itself pays to redeem its debt secu­ri­ties as they mature, using funds obtained by sell­ing new secu­ri­ties to the pub­lic. This “rolling over” of the national debt can be con­tin­ued indef­i­nitely, since the gov­ern­ment can pay what­ever inter­est rate the mar­ket demands for its secu­ri­ties.

    I sup­pose I don’t have to pay my income taxes by Mon­day then, right?

    This site is lit­tered with mis­in­for­ma­tion and is con­sumed by ortho­doxy. We don’t need the present sys­tem we dras­ti­cally need a new one.

    Think the non-pri­vate Dis­trib­utist solu­tions of Social Credit for the gov­ern­men­tal and con­sumer finan­cial par­a­digms. That would elim­i­nate the need for income taxes, wel­fare and social secu­rity taxes. Just issue the money for gov­ern­ment.

    A gap exists between what retail prices are and INDIVIDUAL pur­chas­ing power is and that gap is ENFORCED BY COST ACCOUNTING CONVENTION. Fur­ther­more, each new financial/productive cycle for busi­nesses only enforces that gap. 

    Yes we need to have dou­ble entry book keep­ing for the macro-econ­omy, but 

    There­fore dis­trib­ut­ing a monthly div­i­dend to indi­vid­u­als to fill that gap com­bined with a price dis­count for the same period to elim­i­nate any cost push or demand pull infla­tion enables them to clear the domes­tic mar­ket. And then dis­count

  • Steve Hum­mel

    Sorry, hit the wrong key. After the word “but” in the next to last para­graph should be…

    …we also need to con­sider the real­i­ties enforced by busi­ness cost account­ing.

    Just ignore the words “And the dis­count” at the end

  • alain­ton


    Yes credit come first to cre­ate money but once that debt has been paid off — money destroyed then the inter­est on that debt (in real terms bankers profit) remains in cir­cu­la­tion debt free.

    So imag­ine the same ledger but the debt paid off and the bank closes — does the profit in the bankers profit lose value? No it does not so long as it remains the unit of account for the econ­omy. Once money becomes debt free we don’t need to take out fur­ther debt to redeem the value of the profit on the loan. 

    So innes was right — remem­ber once the loan is paid off their is no longer a ‘debt for the issuer’ in his words. 

    Apro po the bank run frac­tional reserve bank­ing requires that lender of last resort func­tion to main­tain the con­fi­dence in the money issued by that bank, hence inside money is nec­es­sary to sup­port endoge­nous money in those occa­sions, but it does not form the basis for the cre­ation of all endoge­nous money. This is log­i­cally sep­a­rate issue from the numari­are of account issue as in wrays para­ble of a colony forc­ing use of its cur­rency by lev­ey­ing a tax its inhab­i­tants have to pay, forc­ing con­verta­bil­ity of what­ever form of credit money that colony was using before to the new cur­rency.

  • bar­ry­thomp­son

    Great talk from Dirk Beze­mer at INET. Dirk is tak­ing Steve Keen’s ideas into the main­stream.

  • Steve Hum­mel

    Great Video. It dove­tails with per­fectly with Social Credit’s poli­cies and inten­tions. It also dove­tails per­fectly with Steve’s jubilee state­ments, as well as my simul­ta­ne­ous bailout scheme. Shrink the finan­cial sec­tor. Direct finance toward the retail sec­tor. The only thing I can cri­tique is his indi­ca­tion to the Banks and finan­cial author­i­ties that he is not really seri­ous about change by say­ing he’s not here to bash Banks. That plus of course he’s not think­ing about the most opti­mal way to shrink the finan­cial sec­tor, namely a simul­ta­ne­ous bailout/debt reduc­tion pro­gram for both Banks AND indi­vid­u­als, and the best way to direct finance (that is money) to the retail sec­tor, namely a cost­less div­i­dend to every­one in per­pe­tu­ity which is pre-pro­grammed over­whelm­ingly for con­sump­tion of goods and ser­vices. Now THAT is the REAL cut­ting edge.

  • alain­ton

    Thanks Barry reminds me of a mar­vel­lous paper from Dirk on all the issues above — he also has one com­ing with some co authors which will be of great inter­est

  • RJ

    Apro po the bank run frac­tional reserve bank­ing requires that lender of last resort func­tion to main­tain the con­fi­dence in the money issued by that bank, hence inside money is nec­es­sary to sup­port endoge­nous money in those occa­sions, but it does not form the basis for the cre­ation of all endoge­nous money”

    FRB was a Govt imposed RESTRICTION to limit bank lend­ing. So bank lend­ing was in the­ory restricted by bank held BASE MONEY. But has been largely dropped now and has lit­tle (noth­ing) to do with lender of last resort.

    Inside money is a non­sense term. Debt is NEVER used as money. Money is a finan­cial asset that is ALWAYS BACKED BY DEBT. So why use this term.

    Endo­ge­neous money is what we have today. Bank credit that varies based on cap­i­tal restric­tions, bank profit require­ments and demand and suit­abil­ity of bor­row­ers.

  • RJ

    So imag­ine the same ledger but the debt paid off and the bank closes – does the profit in the bankers profit lose value?”

    Inter­est mostly recy­cles. As expenses and div­i­dends. but lets say a bank has REs when it closes down (or more real­is­ti­cally is sold)

    The bal­ance is

    DEBIT Bank loan (bank asset)
    CREDIT Banks REs

    The bank loan is the banks asset but the bor­row­ers LIABILITY. This lia­bil­ity (a bank asset that has value) will be sold on (along with the banks cus­tomers).

  • RJ

    debt reduc­tion pro­gram for both Banks AND indi­vid­u­als, ”

    Debt has two sides. An asset and equal lia­bil­ity

    If you reduce debt then pen­sion funds, savers and our money sup­ply will be smashed

    Its what Euro coun­tries are try­ing with dis­as­trous con­se­quences. Youth unem­ploy­ment over 50% in Spain,. Due entirely to unbe­liev­ably igno­rance about money and bank­ing.

  • RJ


    namely a cost­less div­i­dend ”

    Only is your fan­tasy world SH

  • alain­ton


    You dont deal with the issue of the toy model I set down, a bank with one loan which is paid off, leav­ing an asset on the bal­ance sheet, prof­its from inter­est with­out a cor­re­spond­ing lia­bil­ity, think of it in terms of the account­ing equa­tion.


    if a sin­gle owner had put in £1m equity and the loan has pro­duced 1.05m pay­back (lets keep it a short term loan for sim­plic­ity) then inter­est from the loan of 0.05m would be moved from a loans account to a reserves account. The dou­ble entry would be entered as a lia­bil­ity on the loans account but once the firm is bro­ken up and the reserves returned to the sin­gle share­holder then that lia­bil­ity van­ishes ‘kapoof’ — it is debt free money. There is an extra 0.05m in cir­cu­la­tion that is not backed by any lia­bil­ity — it is debt free. Look­ing at the equa­tion above you can see why — it is a lia­bil­ity to your­self, and as it is self can­celling can be treated as equity. 

    Now think of a cen­tral bank like this — as in Neils model –any ‘profit of the CB sim­ply becomes equity of the state. Now imag­ine the state is granted a cen­tral bank loan to build a toll bridge, and that yields a profit which is then spent on pub­lic spend­ing. That money is entirely new ‘inside money’ with­out a cor­re­spond­ing lia­bil­ity to repay. (im not fixed to any par­tic­u­lar term for state money BTW they are all prob­lem­atic espe­cially ‘high pow­ered money’).

  • RJ

    it is debt free money.”

    It is NOT debt free money. As I have clearly shown above (twice). You can ignore the rules of dou­ble entry book keep­ing but then you move into a fan­tasy world. One that many econ­o­mists live in but has lit­tle to do with the real world.

  • cen­ter­line

    OK… I am with Andrew’s obser­va­tion that inter­est remains in the sys­tem debt free. In my mind, the ques­tion then becomes, what hap­pens when we com­bine it with the notion (err… real­ity) that pri­vate banks cre­ate money/debt, and a large degree of this occurs in unreg­u­lated space where lever­age is much more sig­nif­i­cant that any­one really wants to admit? 

    Again, think of the fancy finan­cial instru­ments, which in them­selves become com­plex debts (as opposed to sim­ple debts like dol­lars) whose behav­ior is far more dif­fi­cult to pre­dict.

    Oh, and to keep the sys­tem in bal­ance, banks sim­ply employ bilat­eral net­ting — which could in a panic result in another finan­cial dis­as­ter. It seems to me the “bail outs” where to to stop net expo­sure from becom­ing gross expo­sure and spread­ing fur­ther through the sys­tem. In effect, the Fed was forced to issue cur­rency as the pri­vate bank­ing sec­tor had already cre­ated the demand in a space that was not mate­r­ial to the macro econ­omy until credit accel­er­a­tion failed. Again, I am assert­ing (from an arm­chair per­spec­tive mind you please) that the tail is wag­ging the dog!

  • cen­ter­line

    RJ / Andrew — my apol­ogy for the seman­tics again. To bridge the gap here, pos­si­bly I could have stated that inter­est is not “debt free” but the debt com­po­nent of this entry is dif­fer­ent than that of the orig­i­nal load/credit. The books still bal­ance, but the money remains in cir­cu­la­tion after the orig­i­nal loaned money is extin­guished. Removal of the addi­tional money from the sys­tem would seem to me to have to be through another mech­a­nism (tax­a­tion?).

  • RJ

    April 16, 2012 at 12:47 am | #

    OK… I am with Andrew’s obser­va­tion that inter­est remains in the sys­tem debt free. In my mind, the ques­tion then becomes,”

    So give the jour­nal entries (as I have done above) to back this up. It’s is impos­si­ble non­sense. (that only peo­ple igno­rant of dou­ble entry book keep­ing can believe)

    Inter­est is no more than a two party off­set entry. One party takes the rev­enue inter­est + finan­cial asset the other the inter­est expense + finan­cial lia­bil­ity

  • cen­ter­line

    Steve Hum­mel —

    I am still not sure on this, but a thought of mine is that gov­ern­ment debt may be a nec­es­sary bur­den. But, it is not the over­all level of debt that mat­ters (caveat being rel­a­tive effect on other cur­ren­cies as they are pinned or float of course). Rather it is the rate of change of debt that really mat­ters.

    Of course, this does make one won­der if it is from within the design of the sys­tem or from forces out­side the sys­tem (greed and power per se), the sys­tem winds up accel­er­at­ing (as it is now) and becom­ing more pro­gres­sively unsta­ble.

    Again… just thoughts.

  • cen­ter­line

    RJ — see my post above. I think you got to me before I could clar­ify. My mis­take again. So easy to trip up on “word­ing” here. You guys are worse than lawyers (ha, ha).

  • Lyon­wiss

    @ Cen­ter­line April 15, 2012 at 3:01 pm

    It is quite wrong to say “it is all debt of one form or another”. (You con­cede too eas­ily to blus­ter.) The money which is “legal ten­der” is not debt, cer­tainty not gov­ern­ment debt (which is reduced by print­ing money). Why would you take money to the gov­ern­ment to claim or redeem what? 

    Money is not debt. With debt, you claim a stream inter­est pay­ments and usu­ally also the prin­ci­pal on matu­rity, con­trac­tual agreed. Money has no con­tarct and no used by date. You can can­cel debt, but you can­not can­cel money as such (except rarely by the cen­tral bank).

    Banks can only cre­ate debt, not money. Bank lend­ing cre­ates long-term debt (eg mort­gages) as bank assets and also simul­ta­ne­ously cre­ate short-term debt (eg deposits) as bank lia­bil­i­ties. No money is cre­ated. Deposits are debt, not money. A bank run proves that bank lend­ing does not cre­ate money and that bank deposits are not money. 

    Due to bank­ing reg­u­la­tion, bank credit is nor­mally trusted and accepted, but not nec­es­sar­ily guar­an­teed. When trusted, bank credit may be used to set­tled trans­ac­tions (par­tic­u­larly with other banks), ful­fill­ing one of the func­tions of money. 

    The trans­ac­tional prop­erty of debt (in nor­mal times) is the ori­gin of the wide­spread con­fu­sion in the writ­ing many econ­o­mists, includ­ing Schum­peter and recently cited ref­er­ences of Mitchell, Innes etc. Their con­fu­sion is also helped by flawed def­i­n­i­tions of M1 to M3, the other “money”, with all includ­ing M0, which is quite dis­tinct from the other debt com­po­nents of “money”.

    The fal­lacy com­mit­ted by many is sum­marised as fol­lows: If A=bank credit, B=money and P=transactional abil­ity, then the fal­lacy is to say: A has P and B has P, there­fore A=B.

    Eco­nom­ics is in such a mess because its com­mon accep­tance of the abuse of lan­guage and the tol­er­ance of vague notions. The dis­tinc­tion between credit and money is crit­i­cal, with­out which many puz­zles (rarely men­tioned) can­not be solved. I will have to cor­rect this wide­spread mis­con­cep­tion in greater detail else­where, in view of a long eco­nomic his­tory on the notion of money.

  • bar­ry­thomp­son

    Steve Keen’s talk at INET is up:

  • RJ

    April 16, 2012 at 1:06 am | #

    I am still not sure on this, but a thought of mine is that gov­ern­ment debt may be a nec­es­sary bur­den.”

    Govt debt is not a bur­den. In fact it is essen­tial.

    Govt debt for a mon­e­tary sov­er­eign coun­try is a finan­cial asset cre­ated by sim­ple jour­nal entries. The other side is an inter­est bear­ing finan­cial asset held by the non Govt sec­tor

    We need debt to sup­port

    –Money and
    –Sav­ings esp as we age

    If Govt does not front up with debt (from deficits) the debt must come from the non Govt sec­tor. Which means huge prof­its for financiers. Hence the mis­in­for­ma­tion that Govt debt is bad.

  • RJ

    April 16, 2012 at 1:26 am | # 

    Banks can only cre­ate debt, not money”

    What com­plete and utter garbage. As is most of your post.

  • RJ

    Deposits are debt, not money.”

    Hope­fully this is a piss take (please say it is)

    Deposits are a lia­bil­ity to banks BUT MONEY to the non bank sec­tor. That’s how finan­cial assets and lia­bil­i­ties work

    One party hold the finan­cial asset (say money or bonds). The other the finan­cial lia­bil­ity (often called debt).

  • alain­ton

    RJ please address the issue of assets and libail­i­ties can­celling under the account­ing equa­tion, do some t accounts and bal­ance sheets. If the asset and lia­bil­i­ties can­cel and are held by the same party you cant talk of it as debt can you? It just the same as me open­ing up accounts in Microsoft money for sweetie fund and hol­i­day fund and raid­ing one for another. I am nei­ther a cred­i­tor or a debtor. Its your sweetie fund fal­lacy.

    And please calm down, too many sweets maybe.

  • RJ

    Assets always = lia­bil­i­ties + SHFs

    The key though with money (and inter­est and bonds) is it is a finan­cial asset.

    These are dif­fer­ent to phys­i­cal assets (gold prop­erty stock etc) as a finan­cial asset held by one party is ALWAYS backed by a finan­cial lia­bil­ity (called DEBT) held by another one.

    So money held by me in say Barclay’s = an asset to me but a lia­bil­ity to Barclay’s

    It’s basic stuff that very few econ­o­mists (or politi­cians) under­stand.

  • Steve Hum­mel

    Money needs to rapidly evolve toward being a ticket for dis­tri­b­u­tion of goods and ser­vices much more than any of the other of its sup­pos­edly “legit­i­mate” func­tions or prop­er­ties. This will never hap­pen so long as it is con­sid­ered a com­mod­ity, and is con­trolled by a small pri­vate minor­ity. It will also never hap­pen so long as profit is the PRIMARY pur­pose of the eco­nomic sys­tem. If profit is a sec­ondary or ter­tiary pur­pose that is fine, but the ACTUAL, CONSCIOUS, INTENTIONAL PRIMARY pur­pose must change to dis­tri­b­u­tion and pol­icy must reflect that change or its round and round the dis­as­ter­ous boom/bust cycle for­ever and ever, amen. 

    Account­ing is a good tool, but it is not an ulti­mate real­ity. Human sys­tems are human con­structs. Actual Inten­tion is every­thing for humans and sys­tems. Change the inten­tions, pur­poses and val­ues of a sys­tem and you’ve changed the sys­tem. Are we homo eco­nom­i­cus or homo sapi­ens (wis­dom)?

    Sys­tems wer made for Man, not Man for sys­tems.